We recently returned from a week in China and, once again, arrived back in Australia more confused than before. There were, however, three clear themes to call out:
1. Trade and Tariff Wars Dominate
In our many trips to China, there’s never been such singular focus on a specific issue. It permeated every conversation and is universally viewed as the number one threat or overhang facing the economy. Some ‘experts’ believe failing to reach an accord would result in tariffs stepping up to 25% post-March 2nd which could shave 1% of GDP (if ever reported) and cost 4-8 million jobs. Clearly, there are strong incentives to strike a deal.
2. The Real Chinese Economy has Slowed Sharply
While you will never see it in GDP data, there is broad-based evidence of a slowdown: housing sales are flat (refer chart 1), 2018 auto sales fell 6% (the first negative print in 20 years), the birth rate is falling (down 0.5% in 2017, expected to be down 7-10% in 2018 despite the abolition of the one-child policy), consumer electronics volumes are negative and PMIs are contracting for the first time in 29 months.
The cause of the slowdown is multi-faceted and in part reflects efforts to improve the quality of growth. Access to credit has been curtailed, infrastructure expenditure has been more focused and the consumer is responding to the risks on the horizon.
3. Belief Remains In ‘The Beijing Put’
Despite this slowing, there is ironically quiet confidence that ‘what is bad could actually be good’, with weakness in the economy and the ill-effects of a trade war creating another round of stimulus, policy relaxation and delays in implementing reforms. In summary, we believe the bad habits will come back for another ‘fix’.
While in our view it is unlikely that China will be the source of a major economic downturn in 2019, the country could still be affected by one which, were it to occur, would likely emanate from the US.
Many people start the year with New Year’s resolutions to either do things better or differently in the year ahead – the top three are to eat healthier, get more exercise, save more – but for most people reality and pragmatism eventually kick in (research says 80% of resolutions fail by February). This could be a relevant analogy for China with the major resolutions such as deleveraging, economic reform, environmental improvements etc. either being deferred, postponed or cancelled.
We expect economic stability, which is the foundation for social stability, will take precedence. To borrow a phrase from Mario Draghi, we expect ‘whatever it takes’ thinking will dominate.
Naturally, we could be wrong, as there are so many things we simply do not understand about China. Post this trip this list has been extended to include keeping infant formula under lock and key, karaoke booths, lucky dip vending machines, and even inedible ice (see below images).
Image 1 – Infant formula under lock and key
Image 2 – Karaoke gaming booths
Image 3 – Lucky dip vending machines
Image 4 – ‘Inedible’ ice (?)